Democratic backsliding and growth in Serbia
In a previous article, I critiqued this year’s Nobel Prize for its institutional theory on development, highlighting Serbia as a case where economic growth has thrived despite democratic backsliding. Serbia’s GDP growth accelerated under the ruling Serb Progressive Party, defying institutional theory. Other countries described as non-liberal democracies, such as Vietnam, China, and Hungary similarly exhibit strong economic performance (Figure 1).
Figure 1. Electoral democracy indices and GDP of Serbia and Hungary. Source: Author based on V-Dem database and the data of the National Bank of Serbia and the Hungarian National Bank.
Although GDP is not a comprehensive measure of development, I tend to agree with Branko Milanovic that it remains a key indicator of economic performance. Serbia’s government frequently cites GDP statistics to emphasize achievements since 2012 when the ruling Serb Progressive Party came to power. Prime Minister Vučević recently praised Serbia’s cumulative real GDP growth of 22.4% between 2018 and 2023 as “among the best in Europe.” While this is true, it’s only part of the truth. As I will discuss in conclusion, GDP statistics may be misleading and must be analyzed in a broader context to avoid short-termism.
Our research with Russian Marxist Boris Kagarlitsky, who is now serving a 5-year prison term in Russia for his opposition to the war in Ukraine, explores the quality of growth rather than its quantity. Applying a Marxist lens, we examined the role of foreign direct investment (FDI) in driving economic dependency across the Open Balkan countries (Albania, North Macedonia, and Serbia).
FDI, central to Serbia’s political agenda and the Open Balkan initiative, is touted as a cornerstone of economic success. President Vučić highlighted a 12.3% year-on-year increase in FDI, with €4.5 billion expected by the end of 2024. This focus reflects mainstream economic thinking that views FDI as vital for capital accumulation and poverty reduction (Sachs, 2005). However, our analysis suggests a more complex picture.
FDI as the opium of development: Growth without progress
This is not what the Marxist theory of dependency argues (Amin, 1974; Marini, 2022). This theory posits that foreign financial flows to peripheral regions are structured to extract and transfer economic surplus, rather than fostering local development. In the words of Karl Marx (1971: 364), “Capital is sent abroad not because it cannot be applied at home, but because it yields higher profits elsewhere.” The ongoing debacle around the lithium exploitation in Jadar (one protest meeting unwittingly displayed the “Hands off the Adriatic” slogan—Jadar and the Adriatic sound very similar in Serbian) clearly demonstrates this point. Marxist economics argues that FDI “decapitalizes” developing economies by extracting their surplus. FDI appears to provide extra capital for development but conceals ongoing surplus value expropriation by domestic and foreign capitalists, deepening the periphery’s subordinate position. If religion is the opium of the people, FDI is the opium of development: it creates an appearance of development while undermining and restricting development opportunities.
The Open Balkan countries are growing but this growth does not improve economic quality as measured by dependency indicators. Even when it comes to GDP itself, the FDI growth is not statistically significantly correlated with the GDP growth per capita. In some other post-socialist countries, it may even be negatively correlated, as Kagarlitsky and I showed for Armenia.
Our study found that hopes of accelerating development in post-socialist countries with foreign investment are ill-justified. Our research demonstrates that, rather than contributing to capital accumulation, foreign investment has enabled value transfer and capital disaccumulation in the Open Balkan region (and elsewhere in the world), exacerbating external budget deficits, increasing capital outflows, and crowding out domestic investment. A one percent increase in FDI in the Open Balkan inflows is correlated with a drop in the external balance by 0.30 percentage points, an increase of FDI outflows by 0.13 percentage points, and displacement of domestic investment in total gross domestic investment by 3.75 percentage points.
This situation exemplifies what Seers (1969) describes as “growth without development,” where economic growth fails to address social and political issues and can even exacerbate them.
Serbia as European “super-periphery”
Is it also true for Serbia, which is often characterized as European “super-periphery” or “periphery of the periphery”? Let us not blame FDI for everything. Marxist economics doesn’t vilify FDI as the ultimate evil. FDI may be a valuable resource for a country that wishes to throw off the shackles of dependency and, through delinking from the capitalist center, reorient towards self-centered development. This is however difficult given the unequal relations of power between the capitalist center and periphery and requires a bold “mission-oriented” economic governance geared towards the development of the internal market by boosting backward and forward linkages.
The theory of dependency argues (Amin, 1974) that peripheral economies are dominated by low-value-adding sectors, such as agriculture or extractive industries. Even when periphery countries do engage in manufacturing, this engagement often involves only limited value addition. This results in asymmetric trade relations with more powerful, developed countries. Periphery countries tend to export primary commodities or low-value-added goods and import high-value-added manufactured goods. Next, periphery states are more reliant on international finance, which has a higher cost of capital. In addition, periphery states often have high levels of external debt and spend more on debt service, which can constrain their fiscal autonomy and economic policymaking. Periphery countries often experience higher levels of poverty, inequality, and social deprivation.
These indicators can be grouped into three categories: capital-related, labor-related and indicators related to international exchange. Let us look at how Serbia compares to the EU averages on the key capital-related indicators of dependency in 2003-2022 (Figure 2).
Figure 2. Serbia’s capital-related indicators as a share of the EU average. Source: Author based on WDI database and national statistics.
As can be observed, Serbia is relying significantly more on foreign capital (166% of the EU average), in an effort to compensate for a low level of domestic savings (36% of the EU average) and pays a significant 62% more in interest than the EU countries on average.
Figure 3. Serbia’s labor-related indicators as a share of the EU average. Source: Author based on WDI database and national statistics.
Serbia’s labor force also demonstrates many peripheral features. It is more than 7 times poorer than the EU residents, the average gross monthly wage of Serbian employees is only 44% of the EU average, and its unemployment is almost twice as high as in the EU. In addition, Serbia’s working class is more exploited as shown by a higher level of inequality.
Figure 4. Serbia’s external exchange indicators as a share of the EU average. Source: Author based on the WDI database, WTO data and national statistics.
Lastly, where does Serbia stand when it comes to the exchange with the capitalist center (Figure 4)? Serbia’s exchange is characteristic of a peripheral country. It exports two times more agricultural raw materials as an average EU country but only 27 percent of the EU average for high-technology goods. Its negative external balance on goods and services has been consistently high, 4.6 times higher than the EU average. This means that the country is spending more on foreign-produced goods and services than it earns from selling its own goods and services abroad.
Serbia’s deepening dependency: Deindustrialization and debt
We have examined Serbia’s dependency indicators relative to EU averages, but understanding how these dynamics have evolved over the past two decades is equally crucial. Has Serbia’s position improved, worsened, or remained unchanged? Focusing solely on averages risks oversimplification, akin to a doctor reporting an average temperature in a ward where half the patients are freezing and the others are feverish. Figure 5 provides a detailed trend analysis of Serbia’s key dependency indicators.
The share of Serbia’s agriculture in value addition has remained virtually unchanged (Panel A), while the 7% drop in the share of manufacturing (Panel B) indicates progressive deindustrialization. Manufacturing’s contribution has shifted to services, which often lack the productivity growth and export potential of manufacturing. In developing economies like Serbia, services are dominated by low-value-added activities such as retail trade and informal services, which generate limited income and hinder sustainable growth. This shift challenges structural transformation, as services rarely create the same multiplier effects on employment and innovation as manufacturing does.
Panels C and D highlight rising debt service and a stagnant current account balance. The current account balance, which has remained largely unchanged since 2010, signals Serbia’s continued reliance on exporting lower-value goods and services while importing higher-value goods. This stagnation underscores unresolved structural barriers to improving trade competitiveness and value addition.
The rising debt service burden (Panel C) reveals Serbia’s reliance on external borrowing, aligning with dependency theory’s critique of peripheral economies forced to borrow to sustain growth and infrastructure. High debt service payments divert resources away from productive investment, perpetuating reliance on external financing and limiting financial independence.
Panels E and F show a declining labor share of income against rising worker productivity. Although average net monthly wages doubled from 2013 to 2023 (from RSD 43,932 to RSD 86,007, adjusted for inflation), the divergence between output per worker and labor share indicates inequitable distribution of productivity gains. These benefits are disproportionately captured by capital, reflecting the dynamics of peripheral economies where surplus value is extracted by external capital and domestic elites. This issue is exacerbated by weakened labor institutions and an economic focus on integration into global markets over labor protections.
Figure 5. Trends in Serbia’s key indicators of dependency. Source: Author based on WDI, IMF, ILOSTAT data and national statistics
Addressing dependency in Serbia’s development
While Serbia’s government frequently cites GDP statistics to emphasize its achievements, a closer look at the broader context reveals significant limitations. Over the past 20 years, Serbia’s GDP per capita measured as a percentage of the EU average grew by only 8%. It is an achievement but the one that reflects slow convergence. At its current growth rate, it would take the country 111 years to catch up with the EU average GDP per capita. This stark reality underscores how short-term growth narratives can obscure deeper systemic challenges that hinder Serbia’s economic transformation.
Serbia’s development trajectory, while marked by growth, remains deeply entrenched in dependency structures. Broader static and dynamic indicators highlight Serbia’s reliance on foreign capital, labor constraints, and unequal external exchange. Characteristics such as dependence on low-value exports, high borrowing costs, and deindustrialization reflect systemic barriers to sustainable development. The stagnation of progress over the past decade, particularly in value-chain advancement and equitable income distribution, underscores the challenge of breaking free from dependency.
To address these issues, Serbia must prioritize value-added industries, export diversification, domestic savings, and stronger labor institutions. Reducing reliance on external capital and fostering economic sovereignty are essential for sustainable, inclusive development. Breaking dependency requires bold policy shifts and governance reforms. By addressing structural challenges, Serbia can transition from growth centered on external reliance to development that benefits its people equitably and sustainably.